Coronavirus’s greatest impact on upstream is oil and gas prices, not project delays

Created: Friday, 28 February 2020 09:11

The upstream oil and gas sector’s biggest commercial fear from the Coronavirus (COVID-19) epidemic is its impact on demand and prices

Only a small proportion of global supply comes from the worst-affected regions

Manufacturing shutdowns and shipping bottlenecks are causing project delays. Vessels and other large components being constructed in affected shipyards have the most obvious supply impact. But the volumes at risk are not material in global production terms.

Fraser McKay, Wood Mackenzie head of upstream analysis, said, “For most operators, even if delays stretch to six months, the greatest impact is prevailing oil and gas prices.

“A three-month delay at the Johan Castberg development would dent NPV10 by less than one per cent. The effect of a five per cent increase in remaining CAPEX is approximately double that. However, a sustained Brent price drop of US$10/bbl means US$1bn less cash flow per quarter for operator Equinor.

“Using Wood Mackenzie’s Lens Direct data, we calculate a US$10/bbl change in price (the pull-back in Brent since January) has a US$40bn impact on global cash flow per quarter. For some companies, this could make the difference between increasing shareholder distributions or another year of negative cash flow.”

As there has been little effect on flowing supply so far, industry concern has instead focused on newbuilds.

McKay said, “We estimate projects with peak capacity of 1.5 mmbbl per day and nearly 4 bcfd are at risk of delay relative to our start-up estimates. A total of two mmbbl per day and six bcfd is under construction across Southeast Asia.

“If delays do occur, an average of three months would only reduce 2022 production (the peak year of impact) by 160,000 bpd. A mere scratch on the surface of global supply. But if control of the disease takes a turn for the worse, the impact multiplies quickly.”

In a scenario of accelerated international infection rates, the supply impact would quickly become more severe. If ongoing virus containment efforts prove unsuccessful, production operations at more producing assets in Southeast Asia and beyond could be directly affected. Project delays would get longer, and further component inventory tightening would have knock-on cost effects globally.